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Cola Wars Case Writeup

Cola Wars Case Writeup

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Published by EugenMartens

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Published by: EugenMartens on May 08, 2014
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Strategic Management 12 PB
Prof. ZHENG Xin Prof. ZHANG Haiyan
Cola Wars Continue: Coke and Pepsi in the Twenty-First Century
By Eugen Martens (Student ID: 14900098) Gabriel de Rauglaudre (Student ID: 13946412) March 8, 2014
 
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Introduction
The soft drink industry has been a profitable one in spite of the “cola wars” between the two
largest players. Several factors contribute to this profitability, and these factors also help to show why the profitability of the concentrate production site of the industry has been so much greater than the bottling side. Over the years the concentrate producers have experimented with different levels of vertical integration, and although it has not necessarily been clear which have been more successful historically, some decision criteria can be developed to help determine if and when complete vertical integration is necessary.
Profitability in the soft drink market
As analysis using Porter’s five forces shows why the soft drink industry has been so
profitable. Suppliers and buyers have not had more power over the industry than it has had over them. Internal rivalry, while seeming intense, has not eroded the profitability of the industry because of its concentration and the fact that the two major players have primarily competed on the basis of advertising and promotion and not price. Entry is difficult both for reasons of scale and the strong brand identity of the current major players. Substitutes have not been close enough to take away significant market share, although the emergence of
new substitutes may pose the largest threat to the industry’s profitability.
 
Suppliers and Buyers
Suppliers to the soft drink industry are, for the most part, providing commodity products and thus have little power over the industry. Sugar, bottles and cans are homogenous goods that can be obtained from many sources, and the aluminum can industry has been plagued by excess supply. The one necessary ingredient which is unique is the artificial sweetener; aspartame is clearly preferred by consumers of diet beverages and for a time was under patent protection and therefore only available from one supplier. However the patent expired and another producer entered, reducing the market power of NutraSweet. Buyers can be considered at the customer or the retail level. For consumers, taste will be an important part of the preference for a particular soft drink; thus although there is no monetary switching cost, there may be a loss of enjoyment associated with a less-preferred brand. Because of this, consumers have historically been brand-loyal and not based purchase decision on price.
 
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Retail outlets have not been able to exhibit much buyer power over the industry, although they can do more easily than consumers. Traditionally these outlets have been fragmented and have been reliant on the major soft drink brands to increase store traffic. However, at the time of the case there has already been evidence of some buyer power on the part of grocery stores, as they successfully resisted an attempt to price the varieties with more costly inputs higher. As grocery chains increasingly consolidate and as discount outlets continue to grow, buyer power on the part of retailers is likely to increase.
Substitutes
While the U.S. soft drink market was growing, substitutes did little to interfere. Soft drinks are sufficiently unique that when a consumer wants a soft drink another product is not likely to satisfy. Other cold drinks such as water, juices and ice tea offer similar refreshing qualities, yet they do not have the same taste properties. Hot beverages and alcoholic beverages are not desirable or appropriate for many of the occasions when one would want a soft drink. The one category that threatens soft drink producers
is the “new age”
product, which offers more natural ingredients and/or health benefits. The soft drink industry´s initial answers to these beverages, in the form of Tab Clear and Crystal Pepsi, are not going to compete effectively.
Entry
Significant barriers exist to entering the soft drink industry. Bottling operations have a fairly high minimum efficient scale and require fixed assets that are specific not only to the process of bottling but also to a specific type of packaging. Exit costs are thus also high. Bottling operations do exist which in theory could be contracted out, but they are tied up in a long-term contracts with the major players and thus can only contract with other producers in a limited way. Perhaps the most significant barrier to entry is the strong brand identity associated with the best-selling soft drinks. Placing another cola on the market is not an attractive value proposition.

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